National Atlantic Holdings Corp - Quarterly Report (10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-51127

NATIONAL ATLANTIC HOLDINGS CORPORATION

(Exact name of Registrant as specified in its charter)


New Jersey		22-3316586
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

4 Paragon Way		07728
Freehold, NJ		(Zip Code)
(Address of Registrant’s principal executive
offices)

(732) 665-1100
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 12, 2008, there were outstanding 11,007,487 Common Shares, no par value per share, of the Registrant.


	Page
	Number
PART I

Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		41
Item 4. Controls and Procedures		42

PART II

Item 1. Legal Proceedings		43
Item 1A. Risk Factors		43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3. Defaults Upon Senior Securities		43
Item 4. Submission of Matters to a Vote of Security Holders		43
Item 5. Other Information		43
Item 6. Exhibits		43
EX-11.1: STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I

Item 1. Financial Statements.

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share data)


	March 31,			December 31,
	2008			2007
Investments: (Note 4)
Fixed maturities held-to-maturity (fair value at March 31, 2008 and December 31, 2007 was $42,508 and $41,913, respectively)	$	42,119		$	42,130
Fixed maturities available-for-sale (amortized cost at March 31, 2008 and December 31, 2007 was $254,736 and $269,784, respectively)		255,933			270,519
Equity securities (cost at March 31, 2008 and December 31, 2007 was $1,000 and $1,014, respectively)		1,000			1,012
Short-term investments (cost at March 31, 2008 and December 31, 2007, was $3,350 and $457, respectively)		3,350			457

Total investments		302,402			314,118
Cash and cash equivalents		36,170			28,098
Accrued investment income		3,612			3,950
Premiums receivable		45,453			47,753
Reinsurance recoverables and receivables		22,045			20,831
Deferred acquisition costs		17,869			18,934
Property and equipment — net		3,049			3,143
Income taxes recoverable		7,038			8,455
Other assets		4,556			4,393

Total assets	$	442,194		$	449,675

Liabilities and Stockholders’ Equity:
Liabilities:
Unpaid losses and loss adjustment expenses (Note 5)	$	194,935		$	197,105
Unearned premiums		82,075			86,823
Accounts payable and accrued expenses		3,202			2,446
Deferred income taxes		10,667			10,829
Other liabilities		10,806			8,296

Total liabilities		301,685			305,499

Commitments and Contingencies: (Note 7)		—			—

Stockholders’ equity:
Common Stock, no par value (50,000,000 shares authorized; 11,425,790 shares issued and 11,007,487 shares outstanding as of March 31, 2008 and December 31, 2007)		97,820			97,820
Retained earnings		46,552			50,541
Accumulated other comprehensive income		429			107
Common stock held in treasury, at cost (418,303 shares held as of March 31, 2008 and December 31, 2007)		(4,292	)		(4,292	)

Total stockholders’ equity		140,509			144,176

Total liabilities and stockholders’ equity	$	442,194		$	449,675

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)


	For the three months ended March 31,
	2008			2007
Revenue:
Net premiums earned	$	41,879		$	39,593
Net investment income		4,131			4,268
Net realized investment gains		3			269
Other income		468			319

Total revenue		46,481			44,449


Costs and Expenses:
Loss and loss adjustment expenses incurred		38,942			25,522
Underwriting, acquisition and insurance related expenses		12,459			12,570
Other operating and general expenses		1,792			560

Total costs and expenses		53,193			38,652

(Loss) income before income taxes		(6,712	)		5,797
(Benefit) provision for income taxes		(2,723	)		1,841

Net (Loss) Income	$	(3,989	)	$	3,956


Net (loss) income per share Common Stock — Basic	$	(0.36	)	$	0.36
Net (loss) income per share Common Stock — Diluted	$	(0.36	)	$	0.35

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)


	For the three months ended March 31,
	2008			2007
Net (Loss) Income	$	(3,989	)	$	3,956

Other comprehensive income — net of tax:
Net holding gains arising during the period		373			492
Reclassification adjustment for realized (gains) included in net income		(59	)		(151	)
Amortization of unrealized loss recorded on transfer of fixed income securities to held-to-maturity		8			15

Total other comprehensive income		322			356

Comprehensive (Loss) Income	$	(3,667	)	$	4,312

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
For the periods ended March 31, 2008 and 2007
(in thousands, except share data)


								Accumulated
								Other								Total
	Common Stock				Retained			Comprehensive			Treasury Stock					Stockholders’
	Shares		Amount		Earnings			(Loss) Income			Shares		Amount			Equity
Balance at December 31, 2006	11,288,190		$	97,570	$	56,735		$	(1,694	)		166,249	$	(1,723	)	$	150,888


Exercise of stock options	12,900			32		—			—			—		—			32

Net Income	—			—		3,956			—			—		—			3,956
Other comprehensive income	—			—		—			356			—		—			356
Repurchase of common stock		—		—		—			—			46,758		(603	)		(603	)

Balance at March 31, 2007	11,301,090		$	97,602	$	60,691		$	(1,338	)		213,007	$	(2,326	)	$	154,629

Balance at December 31, 2007	11,425,790		$	97,820	$	50,541		$	107			418,303	$	(4,292	)	$	144,176


Net Loss	—			—		(3,989	)		—			—		—			(3,989	)
Other comprehensive income	—			—		—			322			—		—			322

Balance at March 31, 2008	11,425,790		$	97,820	$	46,552		$	429			418,303	$	(4,292	)	$	140,509

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)


	For the three months ended March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(3,989	)	$	3,956
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		362			165
Amortization of premium/discount on bonds		245			203
Share-based compensation expense		199			374
Realized gains on investment sales		(3	)		(269	)
Deferred income taxes		(325	)		(376	)
Changes in:
Premiums receivable		2,300			1,840
Reinsurance recoverables and receivables		(1,214	)		2,366
Deferred acquisition costs		1,065			39
Accrued investment income		338			(13	)
Income taxes recoverable		1,418			—
Other assets		(165	)		67
Unpaid losses and loss adjustment expenses		(2,170	)		(6,241	)
Accounts payable and accrued expenses		756			(216	)
Unearned premiums		(4,748	)		(1,269	)
Income taxes payable		—			(750	)
Other liabilities		2,310			904

Net cash (used in) provided by operating activities		(3,621	)		780

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment — net		(268	)		(340	)
Purchases of fixed maturity securities — available-for-sale		(119,152	)		(18,444	)
Sales and maturities of fixed maturity investments — available-for-sale		133,996			24,146
Sales of equity securities		10			1,567
Purchases of short-term investments — net		(2,893	)		—

Net cash provided by investing activities		11,693			6,929

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock—net		—			32
Purchases of common stock held in treasury		—			(603	)

Net cash (used in) financing activities		—			(571	)

Net increase in cash		8,072			7,138
Cash and cash equivalents — beginning of period		28,098			26,288

Cash and cash equivalents — end of period	$	36,170		$	33,426

Cash paid during the period for:
Income taxes	$	250		$	2,900

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 and 2007

1. Nature of Operations

National Atlantic Holdings Corporation (NAHC) and Subsidiaries (the Company) was incorporated in New Jersey, on July 29, 1994. The Company is a holding company for Proformance Insurance Company (Proformance), its wholly-owned subsidiary. Proformance is domiciled in the State of New Jersey and writes property and casualty insurance, primarily personal auto. NAHC’s initial capitalization was pursuant to private placement offerings. The initial stockholders paid $1.16 per share for 2,812,200 shares of Class A common stock.

On February 14, 1995 the Board of Directors approved the offering of up to 645,000 shares at $2.33 per share of nonvoting Class B common stock. At the end of 1995, 283,112 shares were issued at $2.33 per share to new agents and at 105% of the net book value to the officers and directors under a one-time stock purchase program. The average per share price for both issuances of this Class B common stock was approximately $2.05 per share. On April 7, 1995, the Certificate of Incorporation was amended to authorize the issuance of up to 4,300,000 shares of nonvoting common stock.

NAHC also has a controlling interest (80 percent) in Niagara Atlantic Holdings Corporation and Subsidiaries (Niagara), which is a New York corporation. Niagara was incorporated on December 29, 1995. The remaining interest (20 percent) is owned by New York agents. Niagara was established as a holding company in order to execute a surplus debenture and service agreement with Capital Mutual Insurance (CMI). As of June 5, 2000, CMI went into liquidation and is under the control of the New York State Insurance Department. CMI is no longer writing new business and therefore neither is Niagara. Niagara had $0 equity value as of March 31, 2008 and December 31, 2007. NAHC has no remaining obligations as it relates to the agreement.

In addition, NAHC has another wholly-owned subsidiary, Riverview Professional Services, Inc., which was established in 2002 for the purpose of providing case management and medical cost containment services to Proformance and other unaffiliated clients.

In December 2001, NAHC established National Atlantic Financial Corporation (NAFC), to offer general financing services to its agents and customers. In November 2003, NAFC established a wholly-owned subsidiary, Mayfair Reinsurance Company Limited (Mayfair), for the purpose of assuming reinsurance business as a retrocessionaire from third party reinsurers of Proformance and providing reinsurance services to unaffiliated clients.

Another wholly-owned subsidiary of NAHC is National Atlantic Insurance Agency, Inc. (NAIA), which was incorporated on April 5, 1995. The Company purchased all 1,000 shares of NAIA’s authorized common stock at $1 per share. NAIA obtained its license to operate as an insurance agency in December 1995. The agency commenced operations on March 20, 1996. The primary purpose of this entity is to service any direct business written by Proformance and to provide services to agents and policyholders acquired as part of replacement carrier transactions.

On April 21, 2005, an initial public offering of 6,650,000 shares of the Company’s common stock (after the 43-for-1 stock split) was completed. The Company sold 5,985,000 shares resulting in net proceeds to the Company (after deducting issuance costs and the underwriters’ discount) of $62,198,255. The Company contributed $43,000,000 to Proformance, which increased its statutory surplus. The additional capital allowed the Company to reduce its reinsurance purchases and to retain more of the direct written premiums produced by its Partner Agents. On May 8, 2006 and May 16, 2007, the Company contributed an additional $9,000,000 and $4,100,000, respectively, to Proformance, thereby further increasing its statutory surplus. The remainder of the capital raised will be used for general corporate purposes, including but not limited to possible additional increases to the capitalization of the existing subsidiaries.

We manage and report our business as a single segment based upon several factors. Although our insurance subsidiary, Proformance Insurance Company, writes private passenger automobile, homeowners and commercial lines insurance, we consider those operating segments as one operating segment due to the fact that the nature of the products are similar, the nature of the production processes are similar, the type of class of customer for the products are similar, the methods used to distribute the products are similar and the nature of the regulatory environment is similar. In addition, these lines of business have historically demonstrated similar economic characteristics and as such are aggregated and reported as a single segment. Also, in addition to Proformance, all other operating segments wholly owned by the Company are aggregated and reported as a single segment due to the fact that the nature of the products are similar, the nature of the production processes are similar, the type of class of customer for the products are similar, the methods used to distribute the products are similar and the nature of the regulatory environment is similar.

2. Basis of Presentation

The unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments necessary for a fair presentation of the interim periods presented have been made. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These unaudited financial statements and the notes thereto should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Company’s Form 10-K (File No. 000-51127) filed by the Company with the Securities and Exchange Commission on March 17, 2008.

3. Adoption of New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information about the extent to which companies’ measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. In February 2008, the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1) and FSP 157-2, “Effective Date of FASB Statement No. 157,” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 until fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. SFAS 157 was effective for financial statements issued for fiscal years beginning November 15, 2007 and was adopted by the Company, as it applies to its financial instruments, effective January 1, 2008. The adoption of SFAS 157 did not have any financial impact on the Company’s consolidated financial statements. The disclosures required by SFAS 157 are discussed in Note 11 — Fair Value Measurements of the unaudited Condensed Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of SFAS 115 (SFAS 159). SFAS 159 permits all entities to choose, at specified election dates, to measure eligible items at fair value. An entity shall report unrealized gains and losses for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option is to be applied on an instrument by instrument basis and is irrevocable unless a new election date occurs and is applied only to an entire instrument. SFAS 159 was effective in the first quarter of 2008. The Company has not elected to apply the fair value option to any of its financial instruments.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (revised 2007) “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any non-controlling interest at their fair values as of the acquisition date. SFAS 141(R) also requires that acquisition- related costs be recognized separately from the acquisition. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS 141(R) to have a material effect on its current consolidated financial position and results of operations.

In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling interests in Consolidated Financial Statements”, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008. No other entity has a minority interest in any of the Company’s subsidiaries; therefore, the Company does not expect the adoption of SFAS 160 to have an impact on its current consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities, am amendment of FASB Statement No. 133” (“SFAS 161”). This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the first quarter of fiscal 2009. The Company is assessing the potential impact that the adoption of SFAS 161 may have on its financial statements.

4. Investments

On January 1, 2006, the Company transferred certain fixed income securities previously classified as available-for-sale to held-to-maturity. The Company had previously classified these investments as available-for-sale in accordance with paragraph 6 of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115) which states that “At acquisition, an enterprise shall classify debt and equity securities into one of three categories: held-to-maturity, available-for-sale and trading. At each reporting date, the appropriateness of the classification shall be reassessed.” Management has determined that as of January 1, 2006, the securities should be transferred to the held-to-maturity category as the Company has the positive intent and ability to hold these securities to maturity.

As outlined in paragraph 15 of SFAS 115, the transfer of securities between categories of investments shall be reported at fair value. At the date of transfer, the unrealized holding gain or loss, for a debt security transferred into the held-to-maturity category from the available-for-sale category, shall continue to be reported in a separate component of shareholders’ equity, but shall be amortized over the remaining life of the individual securities.

On January 1, 2006, the Company reduced the cost basis of the transferred securities to the fair value as of that date. The Company recorded, as a component of accumulated other comprehensive loss on the balance sheet, an unrealized loss on the transfer of securities to held-to-maturity from available-for-sale in the amount of $750,917. On January 1, 2006, the Company began to amortize over the life of the investments as an adjustment of yield, in a manner consistent with the amortization of any premium or discount on the statement of income and accumulated other comprehensive loss on the balance sheet, amortization of the unrealized loss. For the three months ended March 31, 2008 and March 31, 2007 the Company amortized $22,631 and $22,631 respectively.

The amortized cost and estimated fair value of the held-to-maturity investment portfolio, classified by category, as of March 31, 2008 is as follows:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(Unaudited)
Fixed maturities:
U.S. Government, government agencies and authorities	$	6,781,938	$	492,386	$	—		$	7,274,324
State, local government and agencies		2,841,440		52,752		(7,164	)		2,887,028
Industrial and miscellaneous		32,496,105		521,473		(671,040	)		32,346,538

Total Investments - Held-to-Maturity	$	42,119,483	$	1,066,611	$	(678,204	)	$	42,507,890

The amortized cost and estimated fair value of the available for sale investment portfolio, classified by category, as of March 31, 2008 is as follows:


	Cost/		Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(Unaudited)
Fixed maturities:
U.S. Government, government agencies and authorities	$	165,820,132	$	1,093,536	$	(48,583	)	$	166,865,085
State, local government and agencies		60,901,716		681,533		(75,095	)		61,508,154
Industrial and miscellaneous		23,525,407		47,793		(546,928	)		23,026,272
Mortgage-backed securities		4,488,442		48,343		(3,306	)		4,533,479

Total fixed maturities		254,735,697		1,871,205		(673,912	)		255,932,990

Other Investments:
Short-term investments		3,349,958		—		—			3,349,958
Equity securities		1,000,000		—		—			1,000,000

Total Investments — Available-for-Sale	$	259,085,655	$	1,871,205	$	(673,912	)	$	260,282,948

The fair values of held-to-maturity securities at March 31, 2008 by contractual maturity are shown below. Expected maturities of securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.


			Estimated
	Amortized Cost		Fair Value
	(Unaudited)		(Unaudited)
Due in one year or less	$	—	$	—
Due in one year through five years		10,156,632		10,681,303
Due in five years through ten years		23,512,064		23,797,490
Due in ten through twenty years		8,224,001		7,809,475
Due in over twenty years		226,786		219,622

Total	$	42,119,483	$	42,507,890

The fair values of available-for-sale securities and short-term investments at March 31, 2008 by contractual maturity are shown below. Expected maturities of mortgaged-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.


			Estimated
	Amortized Cost		Fair Value
	(Unaudited)		(Unaudited)
Due in one year or less	$	7,064,918	$	7,066,585
Due in one year through five years		7,164,137		7,030,953
Due in five years through ten years		103,601,581		104,324,308
Due in ten through twenty years		135,766,577		136,327,623
Due in over twenty years		—		—
Mortgage-Backed Securities		4,488,442		4,533,479

Total	$	258,085,655	$	259,282,948

For the three months ended March 31, 2008, the Company held no investments that were below investment grade or not rated by an independent rating agency.

Proceeds from sales and maturities of fixed maturity and equity securities and gross realized gains and losses on sales are shown below:


	Three Months Ended March 31,
	2008			2007
	(Unaudited)
Proceeds	$	134,005,810		$	25,712,874
Gross realized gains		7,774			288,205
Gross realized losses		(4,641	)		(18,745	)

There were no securities that were considered to be other-than-temporarily impaired as of March 31, 2008 or December 31, 2007. No other-than-temporary impairments were recognized for the three months ended March 31, 2008 and 2007.

Unrealized losses on held-to-maturity securities, aged less than and greater than twelve months, as of March 31, 2008 are as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
	(Unaudited)
Fixed maturities:
State, local government and agencies	$	—	$	—		$	219,622	$	(7,164	)	$	219,622	$	(7,164	)
Industrial and miscellaneous		1,193,112		(6,583	)		11,906,967		(664,457	)		13,100,079		(671,040	)

Total Investments - Held-to-Maturity	$	1,193,112	$	(6,583	)	$	12,126,589	$	(671,621	)	$	13,319,701	$	(678,204	)

As of March 31, 2008, the Company has 1 held-to-maturity security in the less than twelve month category and 12 securities in the twelve months or more categories. The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Unrealized losses on available-for-sale securities, aged less than and greater than twelve months, as of March 31, 2008 are as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
	(Unaudited)
Fixed maturities:
U.S. Government, government agencies and authorities	$	996,250	$	(3,750	)	$	1,651,334	$	(44,833	)	$	2,647,584	$	(48,583	)
State, local government and agencies		10,005,423		(44,093	)		2,580,971		(31,002	)		12,586,394		(75,095	)
Industrial and miscellaneous		10,846,849		(342,549	)		3,939,280		(204,379	)		14,786,129		(546,928	)
Mortgage-backed securities		865,086		(3,306	)		—		—			865,086		(3,306	)

Total fixed maturities	$	22,713,608	$	(393,698	)	$	8,171,585	$	(280,214	)	$	30,885,193	$	(673,912	)

As of March 31, 2008, the Company has 48 available-for-sale securities in the less than twelve month category and 21 securities in the twelve months or more categories. The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

The components of net investment income earned were as follows:


	Three Months Ended March 31,
	2008			2007
	(Unaudited)			(Unaudited)
Investment income:
Interest income	$	4,129,434		$	4,265,649
Dividend income		15,809			15,763

Investment income		4,145,243			4,281,412
Investment expenses		(13,923	)		(13,304	)

Net investment income	$	4,131,320		$	4,268,108

5. Unpaid Losses and Loss Adjustment Expenses

The changes in unpaid losses and loss adjustment expense reserves are summarized as follows (in thousands):


	For the three						For the
	months ended						year ended
	March 31,						December 31,
	2008			2007			2007
Balance as of beginning of year	$	197,105		$	191,386		$	191,386
Less reinsurance recoverable on unpaid losses		(17,691	)		(17,866	)		(17,866	)

Net balance as of beginning of period		179,414			173,520			173,520

Incurred related to:
Current period		35,325			27,043			125,483
Prior period		3,617			(1,521	)		19,602

Total incurred		38,942			25,522			145,085

Paid related to:
Current period		6,955			5,177			49,020
Prior period		33,702			26,793			90,171

Total paid		40,657			31,970			139,191

Net balance as of period end		177,699			167,072			179,414
Plus reinsurance recoverable on unpaid losses		17,236			18,073			17,691

Balance as of period end	$	194,935		$	185,145		$	197,105

For the three months ended March 31, 2008, we strengthened reserves for prior years by $3.6 million. This includes strengthening of $1.0 million for auto bodily injury reserves and $1.9 million for auto no-fault reserves. In addition, reserves in other liability, auto physical damage and the homeowners lines of business strengthened in the amount of $0.7 million, $0.3 million and $0.8 million, respectively. This was slightly offset by a release in reserves for commercial auto in the amount of $1.1 million.

For the three months ended March 31, 2007, reserves decreased by $6.3 million due to an acceleration in bodily injury claim settlements, which began in 2006; the change in business mix to property lines of business, which are more profitable and whose claims are settled more quickly; and favorable development of personal auto no-fault medical claims. In addition, the loss development patterns we had observed for PIP medical losses were more consistent with industry loss development for this coverage.

For the three months ending March 31, 2007, we released $1.5 million in reserves for prior years. This includes a reduction in personal auto no-fault reserves in the amount of $1.7 million, commercial auto liability reserves in the amount of $0.9 million and homeowners reserves in the amount of $0.1 million, offset by increases in other liability reserves in the amount of $0.8 million and auto physical damage reserves in the amount of $0.4 million.

For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million. This increase was primarily due to increases in the prior year reserves for auto bodily injury coverage which increased by $22.2 million. This increase was due to an inconsistent implementation of a revised claim reserving policy that was uncovered in the third quarter of 2007. Prior year reserves for other liability increased by $3.6 million. This was partially offset by favorable development of $4.6 million in no-fault coverages and $1.6 million in commercial auto liability.

6. Share-based Compensation

The Company accounts for its share-based compensation arrangements under Statement of Financial Accounting Standards No. 123R, Share- Based Payment (SFAS 123R), which requires companies to record compensation costs for all share-based awards over the respective service period for which employee services are received in exchange for an award of equity or equity-based compensation.

The following table summarizes information with respect to stock options outstanding as of March 31, 2008:


			Weighted
	Number of		Average
	Options		Exercise Price
Balance Outstanding at December 31, 2007		174,150	$	3.18

Granted		—		—
Exercised		—		—
Forfeited		—		—

Balance Outstanding at March 31, 2008		174,150	$	3.18

Options Available for Grant		1,000,000

The following table summarizes information with respect to stock options outstanding as of March 31, 2008:


Options Outstanding										Options Exercisable
			Weighted Average
Range of	Number of Stock		Contractual Life		Weighted Average		Intrinsic Value			Number of Stock		Weighted Average		Intrinsic Value
Exercise Prices	Options		(in yrs)		Exercise Price		of Options			Options		Exercise Price		of Options
.98 - 1.29		36,550		3.29		0.98		4.96			36,550		0.98		4.96
2.50 - 2.89		94,600		0.55		2.70		3.24			94,600		2.70		3.24
6.14		43,000		5.03		6.14		(0.20	)		43,000		6.14		(0.20	)

		174,150		2.23	$	3.18	$	2.76			174,150	$	3.18	$	2.76

As of March 31, 2008, all of the Company’s options were fully vested and the Company did not award any options during the three months ended March 31, 2008 and 2007, respectively.

During the three months ended March 31, 2008 and 2007, 0 and 12,900 options were exercised for the Company’s common stock, respectively. During the three months ended March 31, 2008 and 2007, the Company received additional consideration of approximately $0 and $32,250, respectively, from the exercise of the options.

On December 21, 2007, the Board of Directors of NAHC approved the Compensation Committee’s recommendation to grant 60,000 stock appreciation rights (SARS) to certain executive officers under the Company’s 2004 Stock and Incentive Plan. The SARS were granted with a base price of $3.93 per share, which was the closing price of the Company’s common stock on the Nasdaq National Market on the date of grant.

On March 20, 2007, the Board of Directors of NAHC approved the Compensation Committee’s recommendation to grant 345,000 stock appreciation rights (SARS) to the executive officers and other key employees under the Company’s 2004 Stock and Incentive Plan. The SARS were granted with a base price of $12.88 per share, which was the closing price of the Company’s common stock on the Nasdaq National Market on the date of grant.

On March 21, 2006, the Board of Directors of NAHC approved the Compensation Committee’s recommendation to grant 343,000 stock appreciation rights (SARS) to the executive officers and other key employees under the Company’s 2004 Stock and Incentive Plan. The SARS were granted with a base price of $9.94 per share, which was the closing price of the Company’s common stock on the Nasdaq National Market on the date of grant.

During the three months ended March 31, 2008, the Company did not grant any stock appreciation rights under the Company’s 2004 Stock and Incentive Plan.

The following table summarizes information with respect to stock appreciation rights outstanding as of March 31, 2008:


			Weighted
	Number of		Average
	SARS		Grant Price
Balance Outstanding at December 31, 2007		542,002	$	10.87

Granted		—		—
Exercised		—		—
Forfeited		—		—

Balance Outstanding at March 31, 2008		542,002	$	10.87

In accordance with SFAS 123R, the Company records share based compensation liabilities at fair value or a portion thereof (depending upon the percentage of requisite service that has been rendered at the reporting date) based on the Black-Scholes valuation model and will remeasure the liability at each reporting date through the date of settlement; consequently, compensation cost recognized through each period of the vesting period (as well as each period throughout the date of settlement) will vary based on the awards fair value and the accelerated vesting schedule.

The fair-value of stock-based compensation awards (SARS) granted on December 21, 2007 was estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with the following weighted average assumptions as of March 31, 2008:


	As of
	March 31,
	2008
Volatility factor		36.33	%
Risk-free interest yield		2.71	%
Dividend yield		0.00	%
Average life	5.6 years

The fair-value of stock-based compensation awards (SARS) granted on March 20, 2007 was estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with the following weighted average assumptions as of March 31, 2008:


	As of
	March 31,
	2008			2007
Volatility factor		36.33	%		30.10	%
Risk-free interest yield		2.51	%		4.49	%
Dividend yield		0.00	%		0.00	%
Average life	4.7 years			5.8 years

The fair-value of stock-based compensation awards (SARS) granted on March 21, 2006 was estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with the following weighted average assumptions as of March 31, 2008 and 2007:


	As of
	March 31,
	2008			2007
Volatility factor		36.33	%		30.10	%
Risk-free interest yield		2.26	%		4.49	%
Dividend yield		0.00	%		0.00	%
Average life	3.7 years			4.7 years

Volatility factor - This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. We use actual historical changes in the market value of our stock weighted with other similar publicly traded companies in the insurance industry to calculate the volatility assumption, as it is management’s belief that this is the best indicator of future volatility.

Risk free interest yield - This is the implied yield currently available on U.S. Treasury zero-coupon issues with equal remaining term.

Dividend yield - The expected dividend yield is based on the Company’s current dividend yield and the best estimate of projected dividend yields for future periods within the expected life of the option.

Average life - This is the expected term, which is based on the simplified method.

The Company has reported, as a component of other liabilities on the balance sheet, share-based compensation liability at March 31, 2008 and December 31, 2007, of approximately $327,000 and $128,000, respectively. For the three months ended March 31, 2008 and 2007, the Company has reported, as a component of other operating and general expenses on the consolidated statement of operations, share-based compensation expense of approximately $199,000 and $374,000, respectively. For the three months ended March 31, 2008 and 2007, this additional share-based compensation lowered pre-tax earnings by approximately $199,000 and $374,000, respectively, lowered net income by approximately $129,000 and $243,000, respectively, and lowered basic earnings per share by $0.01 and $0.02, respectively. For the three months ended March 31, 2008 and 2007, diluted earnings per share were lowered by $0.01 and $0.02, respectively.

At March 31, 2008, the aggregate fair value of all outstanding SARS was approximately $551,265, with a weighted-average remaining contractual term of 8.71 years. The total compensation cost related to non-vested awards not yet recognized was approximately $224,193 with an expense recognition period of 2 years and 9 months.

7. Commitments and Contingencies

In the course of pursuing its normal business activities, the Company is involved in various legal proceedings and claims. Management does not expect that amounts, if any, which may be required to be paid by reason of such proceedings or claims will have a material effect on the Company’s financial position, operating results or cash flows.

Litigation — The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. The Company accounts for such activity through the establishment of unpaid claims and claim adjustment expense reserves. Management does not believe that the outcome of any of those matters will have a material adverse effect on the Company’s financial position, statement of operations or cash flows.

Operating Leases — The Company has entered into a seven-year lease agreement for the use of office space and equipment. The most significant obligations under the lease terms other than the base rent are the reimbursement of the Company’s share of the operating expenses of the premises, which include real estate taxes, repairs and maintenance, utilities, and insurance. Rent expense for the three months ended March 31, 2008 and 2007 was $241,686 and $237,573, respectively.

The Company entered into a four-year lease agreement for the use of additional office space and equipment commencing on September 11, 2004. Rent expense for the three months ended March 31, 2008 and 2007 was $53,100 and $53,100, respectively.

Aggregate minimum rental commitments of the Company as of March 31, 2008 are as follows:


Year	Amount
2008	$	579,899
2009		545,999

Total	$	1,125,898

In connection with the lease agreement, the Company executed a letter of credit in the amount of $300,000 as security for payment of the base rent.

Guaranty Fund and Assessment — The Company is subject to guaranty fund and other assessments by the State of New Jersey. The Company is also assigned private passenger automobile and commercial automobile risks by the State of New Jersey for those who cannot obtain insurance in the primary market. New Jersey law requires that property and casualty insurers licensed to do business in New Jersey participate in the New Jersey Property-Liability Insurance Guaranty Association (which we refer to as NJPLIGA). Members of NJPLIGA are assessed the amount NJPLIGA deems necessary to pay its obligations and its expenses in connection with handling covered claims. Assessments are made in proportion to each member’s direct written property and casualty premiums for the prior calendar year compared to the corresponding direct written premiums for NJPLIGA members for the same period. NJPLIGA notifies the insurer of the surcharge to the policyholders, which is used to fund the assessment as a percentage of premiums on an annual basis. The Company collects these amounts on behalf of the NJPLIGA and there is no income statement impact. Historically, requests for remittance of the assessments are levied 12-14 months after the end of a policy year. The Company remits the amount to NJPLIGA within 45 days of the assessment request.

For the three months ended March 31, 2008 and 2007, Proformance was assessed $0 and $0, respectively, as its portion of the losses due to insolvencies of certain insurers. We anticipate that there will be additional assessments from time to time relating to insolvencies of various insurance companies. We are allowed to re-coup these assessments from our policyholders over time until we have recovered all such payments. In the event that the required assessment is greater than the amount accrued for via surcharges, the Company has the ability to increase its surcharge percentage to re-coup that amount. As of March 31, 2008 and 2007, the Company recorded $0 and $0, respectively as payable to NJPLIGA.

A summary of the activity related to the change in our NJPLIGA recoverable is as follows:


	Three months ended March 31,
	2008		2007
Collected	$	621,820	$	626,030
Paid		—		—
Recoverable		742,417		1,585,731

The Board of Directors of the NJPLIGA reviews the funding needs of the Unsatisfied Claim and Judgment Fund (UCJF) and NJPLIGA and authorizes assessments for each entity as necessary. The UCJF, as of January 2004, is responsible for payment of pedestrian PIP claims previously paid directly by auto insurers. These assessments reflect the cost of those claims and will be adjusted accordingly going forward. For the three months ended March 31, 2008 and 2007, Proformance was assessed $0 and $0, respectively. The net assessment payable by the Company was $0 and $0 as of March 31, 2008 and 2007, respectively. This amount is reflected as reinsurance payable and ceded written premiums and is not recoverable by the Company.

The Personal Automobile Insurance Plan, or PAIP, is a plan designed to provide personal automobile coverage to drivers unable to obtain private passenger auto insurance in the voluntary market and to provide for the equitable assignment of PAIP liabilities to all licensed insurers writing personal automobile insurance in New Jersey. We may be assigned PAIP business by the state in proportion to our net direct written premiums on personal auto business for the prior calendar year compared to the corresponding net direct written premiums for all personal auto business written in New Jersey for such year.

The State of New Jersey allows property and casualty companies to enter into Limited Assignment Distribution (LAD) agreements to transfer PAIP assignments to another insurance carrier approved by the State of New Jersey to handle this type of transaction. The LAD carrier is responsible for handling all of the premium and loss transactions arising from PAIP assignments. In turn, the buy-out company pays the LAD carrier a fee based on a percentage of the buy-out company’s premium quota for a specific year. This transaction is not treated as a reinsurance transaction on the buy-out company’s book but as an expense. In the event the LAD carrier does not perform its responsibilities, the Company may have to assume that portion of the PAIP assignment obligation in the event no other LAD carrier will perform these responsibilities.

As of March 31, 2008,we have entered into a LAD agreement pursuant to which the PAIP business assigned to us by the State of New Jersey is transferred to Clarendon National Insurance Company (which assigned its rights and obligations under the LAD agreement to Praetorian Insurance Company, effective May 1, 2007), which writes and services the business in exchange for an agreed upon fee.

For the three months ended March 31, 2008 and 2007, the Company was assessed LAD fees of $52,805 and $88,016, respectively, in connection with payments to Praetorian Insurance Company under the LAD agreement.

For the three months ended March 31, 2008, the Company would have been assigned $320,028 and $1,466,931 of premium, respectively, by the State of New Jersey under PAIP, if not for the LAD agreements that were in place, as compared with $481,476 and $1,885,685, respectively, for the comparable periods in the 2006 year. These amounts served as the basis for the fees to be paid to the LAD carriers.

The Commercial Automobile Insurance Plan, or CAIP, is a plan similar to PAIP, but involving commercial auto insurance rather than private passenger auto insurance. Private passenger vehicles cannot be insured by CAIP if they are eligible for coverage under PAIP or if they are owned by an “eligible person” as defined under New Jersey law. We are assessed an amount in respect of CAIP liabilities in proportion to our net direct written premiums on commercial auto business for the prior calendar year compared to the corresponding direct written premiums for commercial auto business written in New Jersey for such year.

Proformance records its CAIP assignment on its books as assumed business as required by the State of New Jersey. For the three months ended March 31, 2008 and 2007, the Company has been assigned $119,823 and $156,963 of premiums and $250,023 and $272,105 of losses, respectively, by the State of New Jersey under the CAIP. On a quarterly basis, the State of New Jersey remits a member a participation report and a cash settlement report. The net result of premiums assigned less paid losses, losses and loss adjustment expenses and other expenses plus investment income results in a net cash settlement due to or from the participating member. The reserving related to these assignments is calculated by the State of New Jersey with corresponding entries recorded on the Company’s consolidated financial statements.

New Jersey Automobile Insurance Risk Exchange

The New Jersey Automobile Insurance Risk Exchange, or NJAIRE, is a plan designed to compensate member companies for claims paid for non-economic losses and claims adjustment expenses which would not have been incurred had the tort limitation option provided under New Jersey insurance law been elected by the injured party filing the claim for non-economic losses. As a member company of NJAIRE, we submit information with respect to the number of claims reported to us that meet the criteria outlined above. NJAIRE compiles the information submitted by all member companies and remits assessments to each member company for this exposure. The Company, since its inception, has never received compensation from NJAIRE as a result of its participation in the plan. The Company’s participation in NJAIRE is mandated by the New Jersey Department of Banking and Insurance. The assessments that the Company has received required payment to NJAIRE for the amounts assessed. The Company records the assessments received as other underwriting, acquisition and insurance related expenses. For the three months ended March 31, 2008 and 2007, we have been assessed $305,175 and $330,603, respectively, by NJAIRE. These assessments represent amounts to be paid to NJAIRE as it relates to the Company’s participation in its plan. For the three months ended March 31, 2008 and 2007, the Company received additional assessments of prior periods in the amount of $0 and $0, respectively. For the three months ended March 31, 2008 and 2007, the Company received reimbursements of prior period assessments in the amount of $0 and $17,783, respectively.

8. Net (Loss) Earnings Per Share

Basic net (loss) income per share is computed based on the weighted average number of shares outstanding during the year. Diluted net (loss) income per share includes the dilutive effect of outstanding stock options, using the treasury stock method. Under the treasury stock method, exercise of options is assumed with the proceeds used to purchase common stock at the average price for the period. The difference between the number of shares issued and the number of shares purchased represents the dilutive shares.

The following table sets forth the computation of basic and diluted (loss) earnings per share:


	For the three months ended March 31,
	2008			2007
Net (Loss) Income applicable to common stockholders	$	(3,989,171	)	$	3,956,230

Weighted average common shares — basic		11,007,487			11,117,723
Effect of dilutive securities:
Options		—			236,436

Weighted average common shares — diluted		11,007,487			11,354,159

Basic (Loss) Earnings Per Share	$	(0.36	)	$	0.36

Diluted (Loss) Earnings per Share	$	(0.36	)	$	0.35

At March 31, 2008, the effect of 68,459 stock options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive.

9. Replacement Carrier Transactions

Hanover Insurance Company

On February 21, 2006, the Company announced that its subsidiary, Proformance Insurance Company, had entered into a replacement carrier transaction with Hanover Insurance Company (“Hanover”) whereby Hanover transferred its renewal obligations for New Jersey auto, homeowners, dwelling fire, personal excess liability and inland marine policies sold through independent agents to the Company. Under the terms of the transaction, the Company offered renewal policies to approximately 16,000 qualified policyholders of Hanover. The Company received approval of this transaction from the New Jersey Department of Banking and Insurance (NJDOBI) on February 16, 2006.

Upon the Closing on February 21, 2006, the Company paid Hanover a one-time fee of $450,000 in connection with this transaction. In addition, within 30 days of the closing, $100,000 was due to Hanover to reimburse Hanover for its expenses associated with this transaction. In May of 2007, the Company paid $666,129 to Hanover, representing the first of two annual payments equal to 5% of the written premium of the retained business for the preceding twelve months, calculated at the 12 month and 24 month anniversaries. As of March 31, 2008, the Company has recorded, as a component of other liabilities on the balance sheet, commission payable to Hanover in the amount of $616,371. Each of these payment types are consideration for the acquisition of the policy renewal rights as stipulated in the replacement carrier agreement, and have been recorded as intangible assets and amortized over the course of the renewal period which began in March 2006. For the three months ended March 31, 2008 and 2007, the Company amortized $45,833 and $68,750 of the one-time fee and other expenses paid to Hanover, respectively. For the three months ended March 31, 2008 and 2007, the Company amortized $333,944 and $104,816 of the payment due Hanover based on 5% of the direct written premium, respectively.

For the three months ended March 31, 2008 and 2007, direct written premium generated from Hanover renewal business was approximately $2,083,817 and $2,248,000, respectively.

Hanover is not liable for any fees and or other amounts to be paid to the Company and as such the Company will not recognize any Replacement Carrier Revenue from this transaction. The revenue that will be recognized as part of this transaction will be from the premium generated by the policies that the Company writes upon renewal.

The Hartford

On September 27, 2005 the Company announced that its subsidiary, Proformance Insurance Company, had entered into a replacement carrier transaction with The Hartford Financial Services Group, Inc (‘The Hartford”) whereby certain subsidiaries of The Hartford (Hartford Fire Insurance Company, Hartford Casualty Insurance Company, and Twin City Fire Insurance) transferred their renewal obligations for New Jersey homeowners, dwelling fire, and personal excess liabilities policies sold through independent agents to the Company. Under the terms of the transaction, the Company offered renewal policies to approximately 8,500 qualified policyholders of The Hartford. The Company received preliminary approval of this transaction when they received a draft of the final consent order from the New Jersey Department of Banking and Insurance (NJDOBI) on September 27, 2005. Final approval of the transaction was received from the NJDOBI on November 22, 2005.

Upon the Closing, Proformance was required to pay to The Hartford a one-time fee of $150,000. In addition, on May 15, 2007, Proformance paid a one-time payment to The Hartford in the amount $253,392, which represented 5% of the written premium of the retained business at the end of the twelve-month non-renewal period. Each of these payment types are consideration for the acquisition of the policy renewal rights as stipulated in the replacement carrier agreement, and were recorded as intangible assets and amortized over the course of the renewal period which began in March 2006. For the three months ended March 31, 2008 and 2007, the Company amortized $0 and $25,000 of the one-time fee paid to The Hartford, respectively. For the three months ended March 31, 2008 and 2007, the Company amortized $0 and $119,352, respectively, of the payment due The Hartford based on 5% of the direct written premium.

For the three months ended March 31, 2008 and 2007, direct written premium generated from The Hartford renewal business was approximately $875,000 and $1,050,000, respectively.

The Hartford is not liable for any fees and or other amounts to be paid to Proformance and as such Proformance will not recognize any Replacement Carrier Revenue from this transaction. The revenue that will be recognized as part of this transaction will be from the premium generated by the policies that renew with Proformance.

10. Treasury Stock

On July 5, 2006, the Board of Directors of the Company authorized the repurchase of a maximum of 1,000,000 shares and a minimum of 200,000 shares of capital stock of the corporation within the next twelve months. On May 24, 2007, the Board of Directors of the Company authorized a one year extension of the buy-back program. As of March 31, 2008, the Company had repurchased 418,303 shares with an average price of $10.26. As of March 31, 2008, the Company is authorized to repurchase an additional 581,697 shares and has fulfilled the minimum repurchase requirement.

The following table summarizes information with respect to the capital stock repurchase as of March 31, 2008:


	Number of Shares				Average
	Maximum		Minimum		Price
Balance at December 31, 2007		581,697		—
Repurchased		—		—		—

Balance at January 31, 2008		581,697		—
Repurchased		—		—		—

Balance at February 29, 2008		581,697		—
Repurchased		—		—		—

Balance at March 31, 2008		581,697		—	$	—

11. Fair Value Measurements

In September 2006, the FASB issued FASB statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years.

The primary effect of SFAS 157 on the Company was to expand the required disclosures pertaining to the methods used to determine fair values.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows:


		Level 1:		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

		Level 2:		Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

		Level 3:		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset or liability’s level with the fair value hierarchy is based in the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2008 are as follows:


		(Level 1)		(Level 2)		(Level 3)
		Quoted Prices in		Significant
		Active Markets		Other		Significant
		for Identical		Observable		Unobservable
Description	March 31, 2008	Assets		Inputs		Inputs
		(In Thousands)
Fixed maturities — available-for-sale		$	—	$	255,933	$	—
Equity securities — available-for-sale			—		1,000		—


Total — available-for-sale		$	—	$	256,933	$	—

The following valuation techniques were used to measure fair value of assets in the table above on a recurring basis as of March 31, 2008.

Securities Available-for-sale : Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The Company’s adoption of SFAS 157 did not apply to those non-financial assets and non-financial liabilities delayed under FSP 157-2 and will be implemented for its fiscal year beginning after November 15, 2008.

12. Merger Agreement with Palisades Safety and Insurance Association

On March 13, 2008, the Company entered into a merger agreement (the “Merger Agreement”) with Palisades Safety and Insurance Association, an insurance exchange organized under NJSA 17:50-1 et seq. (“Palisades”), and Apollo Holdings, Inc., a New Jersey corporation and a direct wholly owned subsidiary of Palisades (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with NAHC continuing as the surviving corporation (the “Surviving Corporation”) and a direct wholly owned subsidiary of Palisades (the “Merger”).

At the effective time and as a result of the Merger, in exchange for their shares of issued and outstanding Company common stock, Company shareholders shall receive $6.25 in cash for each of their shares. The closing price of Company’s shares on the NASDAQ on March 11, 2008 was $5.50.

In addition, at or prior to the effective time of the Merger, each outstanding option to purchase Common Stock and each outstanding stock appreciation right (vested or unvested) will be canceled and the holder will be entitled to receive an amount of cash equal to the difference between the Merger Consideration and the exercise price of the applicable stock option, or the difference between the Merger Consideration and the applicable per share base price of the stock appreciation right, as applicable, less any required withholding taxes.

The Merger Agreement provides that the directors and officers of the Merger Sub immediately prior to the effective time of the Merger will be the directors and officers of the Surviving Corporation.

The Company and Palisades have made customary representations, warranties and covenants in the Merger Agreement. The completion of the Merger is subject to approval by the shareholders of the Company, obtaining regulatory approvals, including antitrust approval, and satisfaction or waiver of other conditions.

The Merger is subject to various closing conditions, including the approval of the Company’s shareholders, the obtaining of certain regulatory approvals specified in the Merger Agreement, the maintenance by the Company of certain stockholders’ equity and capital and surplus measures within prescribed levels, the Company obtaining a directors’ and officers’ liability tail policy for a specified cost and level of coverage, and the maintenance of the A.M. Best Financial Strength Rating of Proformance Insurance Company within a prescribed rating.

The Merger Agreement contains certain termination rights for both the Company and Palisades and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Palisades a termination fee of up to $2,100,000. Furthermore, the Merger Agreement provides that, upon termination of the Merger Agreement under specified circumstances unrelated to a failure of the closing conditions, Palisades may be required to pay the Company certain liquidated damages based on the circumstances relating to such termination.

Simultaneously with the execution and delivery of the Merger Agreement, Palisades and James V. Gorman, the Chief Executive Officer of the Company entered into a voting agreement (the “Voting Agreement”). In the Voting Agreement, Mr. Gorman thereto agreed to vote, or provide his consent with respect to, all shares of Company capital stock held by such him: (1) in favor of the recommendation of the Board of Directors of the Company to the holders of Common Shares; and (2) against any Acquisition Proposal, or any agreement providing for the consummation of a transaction contemplated by any Acquisition Proposal (other than the Merger and other than following any Change in Recommendation made by the Board of Directors pursuant to the requirements of the Merger Agreement); and (3) in favor of any proposal to adjourn a shareholders’ meeting which the Company, Merger Sub and Parent support.

The foregoing description of the Merger, the Merger Agreement and the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the Company’s Form 8-K filed by the Company with the Securities and Exchange Commission on March 13, 2008.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of the financial condition, changes in financial condition and results of operations of the Company should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Q.

Safe Harbor Statement Regarding Forward-Looking Statements

Management believes certain statements in this Form 10-Q may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as “may,” “should,” “estimate,” “expect,” “anticipate,” “intend,” “believe,” “predict,” “potential,” or words of similar import. Forward- looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and risks, many of which are subject to change. These uncertainties and risks include, but are not limited to, economic, regulatory or competitive conditions in the private passenger automobile insurance carrier industry; regulatory, economic, demographic, competitive and weather conditions in the New Jersey market; significant weather-related or other natural or man-made disasters over which we have no control; the effectiveness of our efforts to manage and develop our subsidiaries; our ability to attract and retain independent agents; our ability to maintain our A.M. Best rating; the adequacy of the our reserves for unpaid losses and loss adjustment expenses; our ability to maintain an effective system of internal controls over financial reporting; market fluctuations and changes in interest rates; the ability of our subsidiaries to dividend funds to us; and our ability to obtain additional capital in the future. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of us. Additionally, forward-looking statements speak only as of the date they are made, and we undertake no obligation to release publicly the results of any future revisions or updates we may make to forward-looking statements to reflect new information or circumstances after the date hereof or to reflect the occurrence of future events.

Overview

We provide property and casualty insurance and insurance-related services to individuals, families and businesses in the State of New Jersey. We have been able to capitalize upon what we consider an attractive opportunity in the New Jersey insurance market through:

	•		our extensive knowledge of the New Jersey insurance market and regulatory environment;

	•		our business model which is designed to align our Partner Agents’ interests with management by requiring many of them to retain an ownership stake in us;

	•		our packaged product that includes private passenger automobile, homeowners, personal excess (“umbrella”) and specialty property liability coverage; and

	•		our insurance related services businesses.

During the three months ended March 31, 2008, the New Jersey auto insurance market continued to remain competitive. In continued response to the competitive landscape of the New Jersey auto insurance market we filed for and received approval for various rate changes designed so that our rates remained competitive for the segment of the New Jersey auto insurance market that we focus on. In addition, our plan for future growth relates to capturing a larger share of our Partner Agents business and cross-selling our automobile, homeowners and business insurance products to their existing customers. In addition, for the three months ended March 31, 2008, commercial and homeowners insurance business was 24.2% and 18.9% of our total business, respectively, as compared to 25.7% and 16.9% of our total business, respectively, in the same period in the prior year. We have experienced continued success in packaging the mono-line auto business with the related homeowners policy, thereby further increasing our package policy percentage.

For the three months ended March 31, 2008, our direct written premium decreased by $1.3 million, or 3.1% to $40.0 million from $41.3 million in the comparable period in 2007.

For the three months ended March 31, 2008, the decrease is primarily due to the following: new business generated by our partner agents was $2.3 million during the period, including new business from our Blue Star auto insurance product in the amount of $0.3 million. This was offset by attrition of existing business of $2.2 million, as well as a $1.4 million decrease in premium as a result of decreases in renewal premiums during the period and a reduction in closed agents business as a result of the continued increase in the competitive nature of the New Jersey auto insurance marketplace.

As of March 31, 2008, our shareholders’ equity was $140.5 million, a decrease from shareholders’ equity of $144.2 million as of December 31, 2007.

The Merger Agreement provides that the directors and officers of the Merger Sub immediately prior to the effective time of the Merger will be the directors and officers of the Surviving Corporation.

The Merger Agreement has been made publicly available to provide investors and shareholders with information regarding its terms. It is not intended to provide any other factual information about the Company. The Merger Agreement contains representations and warranties that the parties to the Merger Agreement made to and solely for the benefit of each other. The assertions embodied in such representations and warranties are qualified by information contained in confidential disclosure letters that the parties exchanged in connection with signing the Merger Agreement. Accordingly, investors and shareholders should not rely on such representations and warranties as characterizations of the actual state of facts or circumstances, since they were only made as of the date of the Merger Agreement and are modified in important part by the underlying disclosure letters. Moreover, information concerning the subject matter of such representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures.

We manage and report our business as a single segment based upon several factors. Although our insurance subsidiary, Proformance Insurance Company writes private passenger automobile, homeowners and commercial lines insurance, we consider those operating segments as one operating segment due to the fact that the nature of the products are similar, the nature of the production processes are similar, the type of class of customer for the products are similar, the methods used to distribute the products are similar and the nature of the regulatory environment is similar. In addition, these lines of business have historically demonstrated similar economic characteristics and as such are aggregated and reported as a single segment. Also, in addition to Proformance, all other operating segments wholly owned by the Company are aggregated and reported as a single segment due to the fact that the nature of the products are similar, the nature of the production processes are similar, the type of class of customer for the products are similar, the methods used to distribute the products are similar and the nature of the regulatory environment is similar.

As a densely populated state, a coastal state, and a state where automobile insurance has historically been prominent in local politics, New Jersey has historically presented a challenging underwriting environment for automobile and homeowners insurance coverage.

As a result of New Jersey’s “take all comers” requirement, we are obligated to underwrite a broad spectrum of personal automobile insurance risks. To address this potential problem, since 1998 Proformance has utilized a tiered rating system to price its policies which includes five (5) rating tiers which are based upon the driving records of the policyholders. The purpose of the rating tiers is to modify the premiums to be charged for each insured vehicle on the personal automobile policy so that the premiums charged accurately reflect the underwriting exposures presented to Proformance. As of March 31, 2008, the rating tier modifiers and the distribution of risks within the tiers were as follows:


	Premium
	Modifications		Percent of Total
Tier Designation	Factor		Vehicles
Tier A		0.88		32.0	%
Tier One		1.00		60.5	%
Tier Two		1.70		6.6	%
Tier Three		2.25		0.2	%
Tier Four		2.60		0.7	%

Proformance applies the modification factor to each tier to produce a consistent loss ratio across all tiers. Proformance does not segregate its loss reserves by tier, but rather by line of business. Since the actual distribution of risk may vary from the distribution of risk Proformance assumed in developing the modification factors, Proformance cannot be certain that an underwriting profit will be produced collectively or in any tier.

Our financial results may be affected by a variety of external factors that indirectly impact our premiums and/or claims expense. Such factors may include, but are not limited to:

	•		rises in gasoline prices may serve to decrease the number of miles driven by our policyholders and result in lower frequency of automobile claims; and

	•		an evolving set of legal standards by which we are required to pay claims may result in significant variability in our loss reserves over time.

We believe that proper recognition of emerging trends, and an active response to those trends, is essential for our business. In addition, we believe that the entrants to the New Jersey personal automobile insurance marketplace, such as Mercury General, 21 ^st Century Insurance and GEICO, have provided a new level of competition not previously experienced by us or by our long-term competitors, which could have a material effect on our ability to meet sales goals or maintain adequate rates for our insurance products.

Since we operate in a coastal state and we underwrite property insurance, we are subject to catastrophic weather events, which may have significant impact upon our claims expense or our ability to collect the proceeds from our third party reinsurers. We also underwrite commercial insurance business and we expect that the rate increases on those policies that we have experienced over the last three years will moderate and that rate level reductions may ensue, impacting our ability to maintain our underwriting margins on this business.

As a result of our replacement carrier transactions, we increased the number of independent insurance agencies who are shareholders in NAHC and who, with their aggregate premium volume, provide what we believe are significant growth opportunities for us. Our strategy is to underwrite an increased share of those agencies’ business now underwritten by competing carriers. Successful execution of our intended plan will require an underwriting operation designed to attract and retain more of our agencies’ clientele, and may be affected by lower-priced competing products or enhanced sales incentive compensation plans by our competitors. These factors may require us to increase our new business acquisition expenses from the levels currently experienced to achieve significant new product sales.

In our replacement carrier transactions, we agreed to offer replacement coverage to the subject policyholders at their next nominal policy renewal date. The policyholders are under no obligation to accept our replacement coverage offer. Policyholders who accept our replacement insurance coverage become policyholders of Proformance and enjoy the standard benefits of being a Proformance policyholder. For example, these policyholders enjoy the limitation we provide on our ability to increase annual premiums. We cannot increase the annual premiums paid by these policyholders by more than fifteen percent for three years, unless there is an event causing a change in rating characteristics, such as the occurrence of an auto accident. Those policyholders choosing not to accept the Proformance replacement insurance coverage due to rate or coverage disparities or individual consumer choice must seek replacement coverage with another carrier. Once the Proformance replacement offer has been rejected by a policyholder, Proformance has no further obligation to that policyholder.

The Company records share-based compensation liabilities at fair value or a portion thereof (depending upon the percentage of requisite service that has been rendered at the reporting date) based on the Black-Scholes valuation model and will remeasure the liability at each reporting date through the date of settlement; consequently, compensation cost recognized through each period of the vesting period (as well as each period throughout the date of settlement) will vary based on the award’s fair value and the vesting schedule.

Revenues

We derive our revenues primarily from the net premiums we earn, net investment income we earn on our invested assets and revenue associated with replacement carrier transactions. Net premiums earned is the difference between the premiums we earn from the sales of insurance policies and the portion of those premiums that we cede to our reinsurers.

Investment income consists of the income we earn on our fixed income and equity investments as well as short term investments. The “other income” we earn consists of service fees charged to insureds that pay on installment plans, commission received by NAIA from third party business and revenue from our contract with AT&T in which we provide claims handling and risk data reporting on general liability, automobile liability and physical damage and household move claims. The agreement with AT&T expired on October 15, 2006, was not renewed and is currently in run-off.

Expenses

Our expenses consist primarily of three types: losses and loss adjustment expenses, including estimates for losses and loss adjustment expenses incurred during the period and changes in estimates from prior periods, less the portion of those insurance losses and loss adjustment expenses that we cede to our reinsurers; and acquisition expenses, which consist of commissions we pay our agents. In addition, underwriting, acquisition and insurance related expenses include premium taxes and company expenses related to the production and underwriting of insurance policies, less ceding commissions that we receive under the terms of our reinsurance contracts, and other operating and general expenses which include general and administrative expenses.

The provision for unpaid losses and loss adjustment expenses includes: individual case estimates, principally on the basis of reports received from claim adjusters employed by Proformance, losses reported prior to the close of the period, and estimates with respect to incurred but not reported losses and loss adjustment expenses, net of anticipated salvage and subrogation. The method of making such estimates and for establishing the resulting reserves is continually reviewed and updated, and adjustments are reflected in current operations. The estimates are determined by management and are based upon industry data relating to loss and loss adjustment expense ratios as well as Proformance’s historical data.

Underwriting, acquisition and insurance related expenses include policy acquisition expenses which consist of commissions and other underwriting expenses, which are costs that vary with and are directly related to the underwriting of new and renewal policies and are deferred and amortized over the period in which the related premiums are earned. Also included in underwriting, acquisition and related insurance expenses are NJAIRE assessments, professional fees and other expenses relating to insurance operations.

Other operating and general expenses consist primarily of professional fees, stock based compensation expense and other general expenses which are not directly associated with insurance operations and relate primarily to costs incurred by our holding company.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in our financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. We have identified below two accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of these policies.

Loss and Loss Adjustment Expense Reserves

Significant periods of time can elapse between the occurrence of an insured loss, the reporting to us of that loss and our final payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent actuarially determined best estimates of amounts needed to pay reported and unreported losses and the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter, we review our previously established reserves and adjust them, if necessary.

When a claim is reported, claims personnel establish a “case reserve” for the estimated amount of ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of the claims personnel. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department based on subsequent developments and periodic reviews of the cases.

In accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported. Incurred but not yet reported reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We review incurred but not yet reported reserves quarterly and make adjustments if necessary.

When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, trends in claims frequency and severity, our mix of business, our claims processing procedures, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. A change in any of these factors from the assumptions implicit in our estimate can cause our actual loss experience to be better or worse than our reserves, and the difference can be material. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves and currently established reserves may not prove accurate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period that redundancy is recognized.

For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million. This increase was primarily due to increases in the prior year reserves for auto bodily injury coverage which increased by $22.2 million. This increase was due to an inconsistent implementation of a revised claim reserving policy that was uncovered in the third quarter of 2007. Prior year reserves for other liability increased by $3.6 million. This was offset by favorable development of $4.6 million in no-fault coverages and $1.6 million in commercial auto liability.

The table below sets forth the types of reserves we maintain for our lines of business and indicates the amount of reserves as of March 31, 2008 for each line of business.

National Atlantic Holdings Corporation
Breakout of Reserves by Line of Business
As of March 31, 2008


	Direct		Assumed						Total Balance
	Case		Case		Direct		Assumed		Sheet
	Reserves		Reserves		IBNR		IBNR		Reserves
	(in thousands)
Line of Business:
Fire	$	—	$	36	$	—	$	—	$	36
Allied		—		2		—		—		2
Homeowners		8,717		—		8,877		—		17,594
Personal Auto		92,671		5		45,254		—		137,930
Commercial Auto		10,742		760		12,399		516		24,417
Other Liability		5,542		—		9,414		—		14,956


Total Reserves	$	117,672	$	803	$	75,944	$	516	$	194,935


Reinsurance Recoverables on Unpaid Losses										(17,236	)


Total Net Reserves									$	177,699

In establishing our net reserves as of March 31, 2008, our actuaries determined that the range of reserve estimates at that date was between $165.8 million and $192.6 million. The amount of net reserves at March 31, 2008, which represents the best estimate of management and our actuaries within that range, was $177.7 million. There are two major factors that could result in ultimate losses below management’s best estimate:

	•		More effective claims processes have recently been put in place. If the improvement in our claims handling process is better than expected, losses could develop less than anticipated,

	•		The rate of claims settlements has increased dramatically over the past year. A continuation of this activity could produce ultimate losses below our current estimate.

There are two major factors that could result in ultimate losses above management’s best estimate:

	•		Claims for uninsured motorists generally have a longer development period than other liability losses. If the frequency of uninsured motorist claims increases beyond our current estimated levels, loss emergence could be greater than what we projected in our loss development analysis.

	•		We believe that the claims department has improved its claims handling practices with regard to claims reserving and settlement. These improvements, if not effectively implemented, could result in adverse loss development.

Investment Accounting Policy — Impairment

Our principal investments are in fixed maturities, all of which are exposed to at least one of three primary sources of investment risk: credit, interest rate and market valuation. The financial statement risks are those associated with the recognition of impairments and income, as well as the determination of fair values. Recognition of income ceases when a bond goes into default. We evaluate whether impairments have occurred on a case-by-case basis. Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause and amount of decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations we use in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below amortized cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or subsection; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairment of securities where the issuer, series of issuers or industry has a catastrophic type of loss or has exhausted natural resources; (vi) other subjective factors, including concentrations and information obtained from regulators and rating agencies and (vii) management’s intent and ability to hold securities to recovery. In addition, the earnings on certain investments are dependent upon market conditions, which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets.

Insurance Ratios

The property and casualty insurance industry uses the combined ratio as a measure of underwriting profitability. The combined ratio is the sum of the loss ratio and the expense ratio. The loss ratio is the ratio of losses and loss adjustment expenses to net premiums earned. The expense ratio, when calculated on a statutory accounting basis, is the ratio of underwriting expenses to net written premiums. The expense ratio, when calculated on a GAAP basis, differs from the statutory method specifically as it relates to policy acquisition expenses. Policy acquisition expenses are expensed as incurred under statutory accounting principles. However, for GAAP, policy acquisition expenses are deferred and amortized over the period in which the related premiums are earned. The combined ratio reflects only underwriting results and does not include fee for service income. Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, economic and social conditions and other factors.

Results of Operations

For the three months ended March 31, 2008, our direct written premium decreased by $1.3 million, or 3.1% to $40.0 million from $41.3 million in the comparable period in 2007.

The table below shows certain of our selected financial results for the three months ended March 31, 2008 and 2007 (Unaudited):


	For the three months ended March 31,
	2008			2007
Revenue:
Direct written premiums	$	39,998		$	41,284
Net written premiums		37,173			38,051

Net premiums earned		41,879			39,593
Net investment income		4,131			4,268
Net realized investment gains		3			269
Other income		468			319

Total revenue	$	46,481		$	44,449


Costs and Expenses:
Losses and loss adjustment expenses incurred	$	38,942		$	25,522
Underwriting, acquisition and insurance related expenses		12,459			12,570
Other operating and general expenses		1,792			560

Total costs and expenses		53,193			38,652

(Loss) income before income taxes		(6,712	)		5,797
(Benefit) provision for income taxes		(2,723	)		1,841

Net (loss) income	$	(3,989	)	$	3,956

For the three months ended March 31, 2008 as compared to the three months ended March 31, 2007

Direct Written Premiums . For the three months ended March 31, 2008, our direct written premium decreased by $1.3 million, or 3.1% to $40.0 million from $41.3 million in the comparable period in 2007.

Net Written Premiums. Net written premiums for the three months ended March 31, 2008 decreased by $0.9 million, or 2.4%, to $37.2 million from $38.1 million in the comparable 2007 period. Ceded premiums as a percentage of direct written premiums for the three months ended March 31, 2008 and 2007 was 7.4% and 7.6%, respectively.

Net Premiums Earned. Net premiums earned for the three months ended March 31, 2008 increased by $2.3 million, or 5.8%, to $41.9 million from $39.6 million in the comparable 2007 period.

Net Investment Income. Net investment income for the three months ended March 31, 2008 decreased by $0.2 million, or 4.7%, to $4.1 million from $4.3 million in the comparable 2007 period. The decrease was primarily due to a decrease in invested assets which were $302.4 million and $312.1 million as of March 31, 2008 and 2007, respectively. Our average book yield to maturity as of March 31, 2008 and 2007 was 5.19% and 5.49%, respectively.

Net Realized Investment Gain. Net realized investment gain for the three months ended March 31, 2008 decreased by $0.3 million to $0.0 million from $0.3 million in the comparable 2007 period.

Other Income. Other income for the three months ended March 31, 2008 and 2007 was $0.5 million and $0.3 million, respectively. For the three months ended March 31, 2008, the increase is primarily related to an increase in finance and service fees charged to those paying on an installment basis. Finance and service fees for the three months ended March 31, 2008 and 2007 were $0.5 million and $0.3 million, respectively.

Losses and Loss Adjustment Expenses Incurred. Losses and loss adjustment expenses incurred for the three months ended March 31, 2008 increased by $13.4 million, or 52.5%, to $38.9 million from $25.5 million in the comparable 2007 period.

As a percentage of net premiums earned, losses and loss adjustment expenses incurred for the three months ended March 31, 2008 was 92.8% compared to 64.5% for the three months ended March 31, 2008. The ratio of net incurred losses, excluding loss adjustment expenses, to net premiums earned for the three months ended March 31, 2008 and 2007 was 85.2% and 57.3%, respectively.

Underwriting, Acquisition and Insurance Related Expenses. Underwriting, acquisition and insurance related expenses for the three months ended March 31, 2008 decreased by $0.1 million, or 0.8%, to $12.5 million from $12.6 million in the comparable 2007 period. As a percentage of net written premiums, our underwriting, acquisition and insurance related expense ratio for the three months ended March 31, 2008 was 33.7% as compared to 33.0% for the comparable 2007 period. Underwriting, acquisition and insurance related expenses, excluding changes in deferred acquisition costs for the three months ended March 31, 2008 and 2007 were $11.4 million and $12.6 million, respectively. The effect of a change in the deferred acquisition cost asset is recorded as a reduction of underwriting, acquisition and insurance related expenses. Salary expense for the three months ended March 31, 2008 decreased by $0.3 million to $4.2 million from $4.5 million in the comparable 2007 period.

Other Operating and General Expenses. Other operating and general expenses for the three months ended March 31, 2008 increased by $1.2 million to $1.8 million from $0.6 million in the comparable 2007 period. The increase in other operating and general expenses for the three months ended March 31, 2008 is primarily related to an increase in professional fees in connection with the merger agreement with Palisades, offset by a decrease in share-based compensation expense. For the three months ended March 31, 2008, professional fees increased by $1.3 million to $1.5 million, as compared to $0.2 million for the comparable 2007 period. For the three months ended March 31, 2008, share based compensation expense decreased by $0.2 million to $0.2 million, as compared to $0.4 million for the comparable 2007 period.

Income Tax (Benefit) Expense. Income tax (benefit) expense for the three months ended March 31, 2008 and 2007 was ($2.7) million and $1.8 million, respectively. The decrease in tax expense for the three months ended March 31, 2008, as compared to the same periods in the prior year was due to decreases in income before tax.

Net (Loss) Income. Net (loss) income after tax for the three months ended March 31, 2008 and 2007 was ($4.0) million and $4.0 million, respectively.

Liquidity and Capital Resources

We are organized as a holding company with all of our operations being conducted by our insurance subsidiaries, which underwrite the risks associated with our insurance policies, and our non-insurance subsidiaries, which provide our policyholders and our insurance subsidiaries a variety of services related to the insurance policies we write. We have continuing cash needs for taxes and administrative expenses. These ongoing obligations are funded with dividends from our non-insurance subsidiaries. Our taxes are paid by each subsidiary through an inter-company tax allocation agreement. In addition, a portion of the proceeds of our sale of common stock to our Partner Agents has historically been used to pay taxes.

Proformance’s primary sources of funds are premiums received, investment income and proceeds from the sale and redemption of investment securities. Our non-insurance subsidiaries’ primary source of funds is policy service revenues. Our subsidiaries use funds to pay operating expenses, make payments under the tax allocation agreement, and pay dividends to us. In addition, Proformance uses funds to pay claims and purchase investments.

Our consolidated cash flow (used in) provided by operations was ($3.6) million and $0.8 million for each of the three months ended March 31, 2008 and 2007, respectively. The cash flow provided by operations for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 decreased primarily due to a decrease in unearned premiums and an increase in unpaid losses and loss adjustment expenses, partially offset by an increase in income taxes recoverable.

For the three months ended March 31, 2008 and 2007, our consolidated cash flow provided by investing activities was $11.7 million and $6.9 million, respectively. The increase in cash provided by investing activities for the three months ended March 31, 2008 as compared to the same period in the prior year is primarily related to an increase in fixed maturity investments which were called by the issuers during the period. This was partially offset by the re-investment of funds in fixed maturity investments with lower yields.

For the three months ended March 31, 2008 and 2007, our consolidated cash flow (used in) financing activities was $0 million and ($0.6) million, respectively. For the three months ended March 31, 2008, the decrease in our cash flow used in financing activities is related to a decrease in the repurchase of capital stock during the period.

The effective duration of our investment portfolio was 2.4 years as of March 31, 2008. By contrast, our liability duration was approximately 3.5 years as of March 31, 2008. We do not believe this difference in duration adversely affects our ability to meet our current obligations because we believe our cash flows from operations and investing activities are sufficient to meet those obligations. Pursuant to our tax planning strategy, we invested the $40.6 million received from the Ohio Casualty replacement carrier transaction in long-term bonds in accordance with Treasury Ruling Regulation 1.362-2, which allows us to defer the payment of income taxes on the associated replacement carrier revenue until the underlying securities are either sold or mature. The effective duration of our investment portfolio when excluding these securities is reduced from 2.4 years to 1.9 years.

Management believes that the current level of cash flow from operations and investing activities provides us with sufficient liquidity to meet our operating needs over the next 12 months. We expect to be able to continue to meet our operating needs after the next 12 months from internally generated funds. Since our ability to meet our obligations in the long term (beyond such 12-month period) is dependent upon such factors as market changes, insurance regulatory changes and economic conditions, no assurance can be given that the available net cash flow will be sufficient to meet our operating needs.

There are no restrictions on the payment of dividends by our non-insurance subsidiaries other than customary state corporation laws regarding solvency. Dividends from Proformance are subject to restrictions relating to statutory surplus and earnings. Proformance may not make an “extraordinary dividend” until 30 days after the Commissioner of the New Jersey Department of Banking and Insurance (which we refer to as the Commissioner) has received notice of the intended dividend and has not objected or has approved it in such time. An extraordinary dividend is defined as any dividend or distribution whose fair market value together with that of other distributions made within the preceding twelve months exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31, or the insurer’s net income (excluding realized capital gains) for the twelve-month period ending on the preceding December 31, in each case determined in accordance with statutory accounting practices. Under New Jersey law, an insurer may pay dividends that are not considered extraordinary only from its unassigned funds, also known as its earned surplus. The insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs following payment of any dividend or distribution to stockholders. As of the date hereof, Proformance is not permitted to pay any dividends without the approval of the Commissioner.

Proformance has not paid any dividends in the past and we do not anticipate that Proformance will pay dividends in the foreseeable future because we wish to reduce our reinsurance purchases in order to retain more of the gross premiums written we generate and seek stronger financial strength ratings for Proformance, both of which require that the capital of Proformance be increased. In addition, the payment of dividends and other distributions by Mayfair is regulated by Bermuda insurance law and regulations.

The Company has entered into a seven-year lease agreement for the use of office space and equipment. The most significant obligations under the lease terms other than the base rent are the reimbursement of the Company’s share of the operating expenses of the premises, which include real estate taxes, repairs and maintenance, utilities, and insurance. Rent expense for the three months ended March 31, 2008 and 2007 was $241,686 and $237,573, respectively.

Aggregate minimum rental commitments of the Company as of March 31, 2008 are as follows:


Year	Amount
2008	$	579,899
2009		545,999

Total	$	1,125,898

In connection with the lease agreement, the Company obtained a letter of credit in the amount of $300,000 as security for payment of the base rent.

Investments

As of March 31, 2008 and December 31, 2007, Proformance maintained a high quality investment portfolio. The Moody’s credit quality of the fixed income portfolio ranges from “AAA” to “BAA3” and the average credit quality is “AA1”.

As of March 31, 2008 and December 31, 2007, we did not hold any securities that were not publicly traded, because our investment policy prohibits us from purchasing those securities. In addition, at those dates, we did not have any non-investment grade fixed income securities.

Unrealized losses on held-to-maturity securities, aged less than and greater than twelve months, as of March 31, 2008 are as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
	(Unaudited)
Fixed maturities:
State, local government and agencies	$	—	$	—		$	219,622	$	(7,164	)	$	219,622	$	(7,164	)
Industrial and miscellaneous		1,193,112		(6,583	)		11,906,967		(664,457	)		13,100,079		(671,040	)

Total Investments — Held-to-Maturity	$	1,193,112	$	(6,583	)	$	12,126,589	$	(671,621	)	$	13,319,701	$	(678,204	)

Unrealized losses on available-for-sale securities, aged less than and greater than twelve months, as of March 31, 2008 are as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
	(Unaudited)
Fixed maturities:
U.S. Government, government agencies and authorities	$	996,250	$	(3,750	)	$	1,651,334	$	(44,833	)	$	2,647,584	$	(48,583	)
State, local government and agencies		10,005,423		(44,093	)		2,580,971		(31,002	)		12,586,394		(75,095	)
Industrial and miscellaneous		10,846,849		(342,549	)		3,939,280		(204,379	)		14,786,129		(546,928	)
Mortgage-backed securities		865,086		(3,306	)		—		—			865,086		(3,306	)

Total Investments — Available-for-Sale	$	22,713,608	$	(393,698	)	$	8,171,585	$	(280,214	)	$	30,885,193	$	(673,912	)

Our gross unrealized losses represented 0.45% of cost or amortized cost of the investment portfolio as of March 31, 2008. Fixed maturities represented 99.7% of the investment portfolio and 100.0% of the unrealized losses as of March 31, 2008.

Our fixed income securities in an unrealized loss position have an average “AA1” credit rating by Moody’s, with extended maturity dates, which have been adversely impacted by the increase in interest rates after the purchase date. As part of our ongoing security monitoring process by our investment manager and investment committee, it was concluded that no securities in the portfolio were considered to be other than temporarily impaired as of March 31, 2008. We believe, with the investment committee’s confirmation, that securities that are temporarily impaired that continue to pay principal and interest in accordance with their contractual terms, will continue to do so.

Management considers a number of factors when selling securities. For fixed income securities, management considers realizing a loss if the interest payments are not made on schedule or the credit quality has deteriorated. Management also considers selling a fixed income security in order to increase liquidity. Management considers selling an equity security at a loss if it believes that the fundamentals, i.e. ., earnings growth, earnings guidance, prospects of dividends, and management quality have deteriorated. Management considers selling equity securities at a gain for liquidity purposes. Our investment manager is restricted with respect to the sales of all securities in an unrealized loss position. These transactions require the review and approval by senior management prior to execution.

We review our unrealized gains and losses on at least a quarterly basis to determine if the investments are in compliance with our interest rate forecast and the equity modeling process. Specifically, in the current economic environment, we would consider selling securities if we can reallocate the sales proceeds to more suitable investments as it relates to either our interest rate forecast or equity model.

In addition, we conduct a “sensitivity” analysis of our fixed income portfolio on at least a quarterly basis to determine the market value impact on our fixed income portfolio of an increase or decrease in interest rates of 1%. Based on this analysis, we will continue to hold securities in an unrealized gain or loss position if the payments of principal and interest are not delinquent and are being made consistent with the investment’s repayment schedule. The related impact on the investment portfolio is realized should we decide to sell a particular investment at either a gain or a loss.

Furthermore, if we believe that the yield to maturity determined by the price of the fixed income security can be attained or exceeded by an alternative investment that decreases our interest rate risk and/or duration, we may sell the fixed income security. This may initially increase or decrease our investment income and allow us to reallocate the proceeds to other investments. Our decision to purchase and sell investments is also dependent upon the economic conditions at a particular point in time.

Our policy states that if the fair value of a security is less than the amortized cost, the security will be considered impaired. For investments classified as available for sale, we need to consider writing down the investment to its fair value if the impairment is considered other than temporary. If a security is considered other-than-temporarily impaired pursuant to this policy, the cost basis of the individual security will be written down to the current fair value. The amount of the write-down will be calculated as the difference between cost and fair market value and accounted for as a realized loss for accounting purposes which negatively impacts future earnings.

As of March 31, 2008 and as of December 31, 2007, our fixed income portfolio was 59.9% and 64.9%, concentrated in U.S. government securities and securities of government agencies and authorities that carry an “Aaa” rating from Moody’s, respectively.

As of March 31, 2008 and as of December 31, 2007, we did not have any securities which had a material difference between fair market and cost basis. The following summarizes our unrealized losses by designated category as of March 31, 2008.

Securities in an Unrealized Loss Position for Less than 12 Months


								% of
	Amortized				Unrealized			Unrealized
	Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	24,307,001	$	23,906,720	$	(400,281	)		(1.65	)%

Securities in an Unrealized Loss Position for greater than 12 months


								% of
	Amortized				Unrealized			Unrealized
	Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	21,250,009	$	20,298,174	$	(951,835	)		(4.48	)%

Securities with a Decline in Fair Value Below Carrying Values Less than 20%


								% of
	Amortized				Unrealized			Unrealized
	Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	45,557,010	$	44,204,894	$	(1,352,116	)		(2.97	)%

As of March 31, 2008, we had no securities with a decline in fair value of more than 20%.

Contractual Obligations

The following table summarizes our long-term contractual obligations and credit-related commitments as of March 31, 2008.


	Less than 1						More than 5
	Year		1-3 Years		3-5 Years		Years		Total
Loss and Loss Adjustment	$	101,366,186	$	65,303,216	$	25,341,547	$	2,924,025	$	194,934,974
Expenses (LAE) (1)
Operating Lease Obligations (2)	$	743,699	$	382,199	$	—	$	—	$	1,125,898


(1)		As of March 31, 2008 we had gross loss and LAE reserves of $194.9 million. The amounts and timing of these obligations are not set contractually. Nonetheless, based on cumulative property and casualty claims paid over the last ten years, we anticipate that approximately 52.0% will be paid within a year, an additional 33.5% between one and three years, 13.0% between three and five years and 1.5% in more than five years. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this payment estimate because of the potential impact from changes in:

•		the legal environment whereby court decisions and changes in backlogs in the court system could influence claim payout patterns.

•		our mix of business because property and first-party claims settle more quickly than bodily injury claims.

•		claims staffing levels — claims may be settled at a different rate based on the future staffing levels of the claim department.

•		reinsurance programs — changes in Proformance’s retention will influence the payout of the liabilities. As Proformance’s net retention increases, the liabilities will take longer to settle than in past years.

•		loss cost trends — increases/decreases in inflationary factors (legal and economic) will influence ultimate claim payouts and their timing.

(2)		Represents our minimum rental commitments as of March 31, 2008 pursuant to our seven-year lease agreement for the use of our office space and equipment at 4 Paragon Way, Freehold, NJ 07728 and our four-year lease agreement for the use of our office space and equipment at 3 Paragon Way, Freehold, NJ 07728.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as that term is defined in applicable SEC rules) that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, results of operations, revenues or expenses, liquidity, capital expenditures or capital resources.

Effects of Inflation

We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect interest rates and claim costs.

Adoption of New Accounting Pronouncements

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

General

Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to market risk through our investment activities and our financing activities. Our primary market risk exposure is to changes in interest rates. We have not entered, and do not plan to enter, into any derivative financial instruments for trading or speculative purposes.

Interest Rate Risk

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments. Our fixed maturity investments include U.S. and foreign government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and mortgage-backed securities, most of which are exposed to changes in prevailing interest rates.

All of our investing is done by our insurance subsidiary, Proformance. We invest according to guidelines devised by an internal investment committee, comprised of management of Proformance and an outside director of NAHC, focusing on investments that we believe will produce an acceptable rate of return given the risks assumed. Our investment portfolio is managed by the investment officer at Proformance with oversight from our Chief Accounting Officer and the assistance of outside investment advisors. Our objectives are to seek the highest total investment return consistent with prudent risk level by investing in a portfolio comprised of high quality investments including common stock, preferred stock, bonds and money market funds in accordance with the asset classifications set forth in Performance’s Investment Policy Statement Guidelines and Objectives.

The tables below show the interest rate sensitivity of our fixed income and preferred stock financial instruments measured in terms of fair value for the periods indicated.


	Fair Value
	-100 Basis				+100 Basis
	Point		As of		Point
	Change		03/31/2008		Change
	($ in thousands)
Fixed maturities and preferred stocks	$	310,148	$	302,791	$	295,433
Cash and cash equivalents	$	36,170	$	36,170	$	36,170

Total	$	346,318	$	338,961	$	331,603


	Fair Value
	-100 Basis				+100 Basis
	Point		As of		Point
	Change		12/31/2007		Change
	($ in thousands)
Fixed maturities and preferred stocks	$	323,026	$	313,888	$	304,750
Cash and cash equivalents		28,098		28,098		28,098

Total	$	351,124	$	341,987	$	332,848

Equity Risk

Equity risk is the risk that we will incur economic losses due to adverse changes in the prices of equity securities in our investment portfolio. Our exposure to changes in equity prices primarily result from our holdings of common stocks and other equities. One means of assessing exposure to changes in equity market prices is to estimate the potential changes in market values of our equity investments resulting from a hypothetical broad-based decline in equity market prices of 10%. Under this model, with all other factors constant, we estimate that such a decline in equity market prices would decrease the market value of our equity investments by approximately $100,000 and $101,246 respectively, based on our equity positions as of March 31, 2008 and December 31, 2007.

As of March 31, 2008, approximately 0.3% of our investment portfolio was invested in equity securities. We continuously evaluate market conditions regarding equity securities. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques.

Credit Risk

We have exposure to credit risk as a holder of fixed income securities. We attempt to manage our credit risk through issuer and industry diversification. We regularly monitor our overall investment results and review compliance with our investment objectives and guidelines to reduce our credit risk. As of March 31, 2008, approximately 59.9 % of our fixed income security portfolio was invested in U.S. government and government agency fixed income securities, 34.7% was invested in other fixed income securities rated “Aaa”/“Aa” by Moody’s, and 4.0 % was invested in fixed income securities rated “A” by Moody’s and 1.4 % was invested in other fixed income securities rated “Baa1/Baa3” As of March 31, 2008, we do not own any securities with a rating of less than “Baa3.”

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation of the effectiveness and design of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, our CEO and CFO concluded, as of the end of the period covered by this report, that the design and operation of our disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives

Changes in Internal Control over Financial Reporting

Management has evaluated, with the participation of our CEO and CFO, changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2008. In connection with such evaluation, we have determined that there was no change in our internal control over financial reporting during our fiscal quarter ended March 31, 2008 that has affected materially, or is reasonably likely to affect materially, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors

There have been no significant changes in the risk factors since those disclosed in the Company’s Form 10-K/A (File No. 000-51127) filed by the Company with the Securities and Exchange Commission on March 17, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following documents are filed as part of this report:

	3.1		Form of Amended and Restated Certificate of Incorporation of the Registrant**

	3.2		Form of Amended and Restated Bylaws of the Registrant**

	4.1		Form of Stock Certificate for the Common Stock**

	10.1		Form of Agency Agreements between Proformance Insurance Company and Partner Agents of Proformance Insurance Company**

	10.2		Form of Limited Agency Agreements between Proformance Insurance Company and Non-Active Replacement Carrier Service Agents of Proformance Insurance Company**

	10.3		Replacement Carrier Agreement, dated December 18, 2001, among the Registrant, Proformance Insurance Company and Ohio Casualty of New Jersey, Inc.**

	10.4		Non-Competition Agreement, dated December 18, 2001, among the Registrant, Proformance Insurance Company, The Ohio Casualty Insurance Company and Ohio Casualty of New Jersey**

	10.5		Letter Agreement, dated July 10, 2004, among the Registrant, Proformance Insurance Company and The Ohio Casualty Insurance Company and Ohio Casualty of New Jersey**

	10.6		Replacement Carrier Agreement, dated December 8, 2003, between the Registrant and Metropolitan Property and Casualty Insurance Company**

	10.7		Share Repurchase Agreement, dated December 8, 2003, between the Registrant and Metropolitan Property and Casualty Insurance Company**

	10.8		Replacement Carrier Agreement, dated March 14, 2003, between Proformance Insurance Company and Sentry Insurance**

	10.9		Replacement Carrier Agreement, dated May 6, 2005, between Proformance Insurance Company and The Hartford Financial Services Group, Inc.*****

	10.9.1		First Amendment to the Replacement Carrier Agreement, dated June 28, 2005, between Proformance Insurance Company and The Hartford Financial Services Group, Inc.*****

	10.1		Limited Assignment Distribution Agreement, effective January 1, 2004, between Proformance Insurance Company and The Clarendon National Insurance Company**

	10.11		Limited Assignment Distribution Agreement, effective January 1, 2004, between Proformance Insurance Company and AutoOne Insurance Company**

	10.12		2004 Stock and Incentive Plan of the Registrant**

	10.13		National Atlantic Holdings Corp. Annual Bonus Plan**

	10.14		Form of Employment Agreement between the Registrant and James V. Gorman, Frank J. Prudente, John E. Scanlan, Cynthia L. Codella and Bruce C. Bassman**

	10.15		Form of Employment Agreement between Proformance Insurance Company and Peter A. Cappello, Jr.**

	10.16		Commutation and Release Agreement, effective as of December 31, 2002, between Odyssey America Reinsurance Corporation and Proformance Insurance Company**

	10.17		Form of Agency Agreements between Proformance Insurance Company and Active Replacement Carrier Service Agents of Proformance Insurance Company**

	10.18		Form of Indemnification Agreement between the Registrant and its directors and officers**

	10.19		Letter Agreement, dated December 7, 2004, among the Registrant, Proformance Insurance Company, The Ohio Casualty Insurance Company and Ohio Casualty of New Jersey**

	10.2		Commutation and Mutual Release Agreement, effective as of March 26, 2003, between Proformance Insurance Company and Gerling Global Reinsurance Corporation of America**

	10.21		Form of Underwriting Agreement among the Company, the Ohio Casualty Insurance Company as Selling Shareholder and the Underwriters named therein**

	10.22		Form of Employee Stock Option Agreement for the Company’s Nonstatutory Stock Option Plan***

	10.23		Form of Amendment to Employee Stock Option Agreement for Certain Options Granted to Messrs. James V. Gorman, Peter A. Capello, Jr. and Steven V. Stallone***

	10.24		Form of Nonstatutory Stock Option Agreement for Certain Stock Options Granted to the Estate of Mr. Frank Campion***

	11.1		Statement re computation of per share earnings*

	31.1		Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*

	31.2		Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*

	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

	32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


*		Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		NATIONAL ATLANTIC HOLDINGS CORPORATION

		By:		/s/ James V. Gorman
				James V. Gorman
				Chairman of the Board of Directors and Chief Executive Officer

		By:		/s/ Frank J. Prudente

				Frank J. Prudente
				Executive Vice President, Treasurer and Chief Financial Officer
				(Principal Financial and Accounting Officer)